Income Limitations on Charitable Giving Deductions

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These slides are taken from the graduate financial planning course "Introduction to Charitable Planning" at Texas Tech University. Details at www.EncourageGenerosity.com

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  • Income Limitations on Charitable Giving Deductions

    1. 1. Income Limits on Charitable Deductions
    2. 2. All slides are taken from this book. Available from Amazon.com Full color version available at www.createspace.com/4707238
    3. 3. If you want to ask BIGyou need to ask for gifts of assets. If you ask for gifts of assets, you need to know these rules
    4. 4. We pay taxes on income
    5. 5. Charitable gifts can sometimes be deducted from taxable income, thereby reducing taxes owed
    6. 6. Charitable deductions are limited to 20%, 30%, or 50% of income depending on the gift and recipient
    7. 7. Why should we limit charitable deductions?
    8. 8. Encouraging giving is good, but at least some revenue should go to the government
    9. 9. Otherwise, wealthy people could pay zero taxes by annually transferring assets to charity
    10. 10. Taxes? Oh, no, we don’t pay taxes.
    11. 11. Why are people making such large donations, anyway?
    12. 12. Are people taking vows of poverty and giving away everything they earn?
    13. 13. Actually, the limits are an issue with gifts from assets where wealth is far greater than annual income
    14. 14. A common issue with wealthy retiree donors who have limited taxable income but large assets
    15. 15. Some gifts may be deducted up to 50% of income if given to a public charity, government, or an operating private foundation Note: The term “income” in these slides means adjusted gross income for the year of the gift excluding any net operating loss carryback
    16. 16. Public CharityAnything EXCEPT long- term capital gain or a farmer giving a qualified conservation easement 50% limit
    17. 17. 50% limit Money (given or spent performing services for the charity) Public Charity
    18. 18. 50% limit Any ordinary income property Public Charity Ex: Creations by the donor
    19. 19. Public Charity 50% limit Any ordinary income property
    20. 20. Public Charity Any ordinary income property 50% limit Short-Term Capital Gain Property (held 1 year or less)
    21. 21. Cash and ordinary income property are treated the same because they aren’t long-term capital gain property
    22. 22. 1990 Paid: $1 Current Value: $25 Long-term (>1 year) capital gain property If fair market value of gain property can be deducted, then gifting to a public charity is 30% limit If only basis of gain property can be deducted, then gifting to a public charity is 50% limit
    23. 23. 1990 Paid: $600 acre Current Value: $2,800/acre Long-term capital gain property deducted at fair market value and given to public charity 30% limit
    24. 24. 1990 Paid: $600 acre Current Value: $2,800/acre “Special election” values all long- term capital gain gifts in a year at basis, then such gifts to public charity 50% limit
    25. 25. A similar idea applies to long-term capital gain tangible personal property (All the stuff in your garage, including cars, jewelry, artwork)
    26. 26. Public Charity1990 Paid $1 Current Value: $25 50% limitlong-term capital gain tangible personal property valued at BASIS due to “unrelated use”
    27. 27. Public Charity1990 Paid $1 Current Value: $25 30% limitlong-term capital gain tangible personal property valued at FAIR MARKET VALUE due to “related use”
    28. 28. 30% limit if “for the use of” charity Concept: Money given “in trust” to another entity but charity gets current benefit 1. Paying premiums for charity- owned life insurance or 2. Charitable lead trust CLT or Insurance Company Current Benefit
    29. 29. So, that covers gifts to public charities. What’s about gifts to private foundations?
    30. 30. Anything EXCEPT long- term capital gain 30% limit Bill & Melinda Gates Private Foundation Private Foundation (non-operating)
    31. 31. 30% limit Money (given or spent performing services for the charity) Private Foundation (non-operating) Bill & Melinda Gates Private Foundation
    32. 32. 30% limit Any ordinary income property Ex: Creations by the donor Private Foundation (non-operating) Bill & Melinda Gates Private Foundation
    33. 33. 30% limit Any ordinary income property Private Foundation (non-operating) Bill & Melinda Gates Private Foundation
    34. 34. Any ordinary income property 30% limit Private Foundation (non-operating) Bill & Melinda Gates Private Foundation Short-Term Capital Gain Property (held 1 year or less)
    35. 35. 20% limit 1990 Paid $1 Current Value: $25 Bill & Melinda Gates Private Foundation Long-Term Capital Gain Property Private Foundation (non-operating)
    36. 36. 20% limit Bill & Melinda Gates Private Foundation Private Foundation (non-operating) Long-Term Capital Gain Property (including tangible personal property) Current Value: $25 1990 Paid $1
    37. 37. C-corp: limited to 10% of taxable income with 5-year carry forward. S-corp: passes through all deductions to shareholders. Corporate Giving
    38. 38. Current Value: $25 1990 Paid $1 Long-term capital gain property valued at basis “unrelated” use tangible personal property Public Charity Public Charity Anything except long-term capital gain property (e.g., cash or ordinary income property) special election
    39. 39. Current Value: $25 1990 Paid $1 “related use” tangible personal property Public Charity Private Foundation (non-operating) no special election Bill & Melinda Gates Private Foundation Long-term capital gain property valued at fair market value Anything except long-term capital gain property (e.g., cash or ordinary income property)
    40. 40. Any long-term capital gain property Current Value: $25 1990 Paid $1 Private Foundation (non-operating) Bill & Melinda Gates Private Foundation
    41. 41. What happens if you give more than the limit?
    42. 42. The excess deduction may be used later (as soon as charitable deductions do not exceed the income limits), but must be used within five years.
    43. 43. Unused charitable deductions may be carried over for up to 5 years Year 1 Charitable Deduction Maximum for Each Year Deductible in Year 1 (under limit) Not Deductible in Year 1 (over limit) Deductible Carryover Deductible Carryover Deductible Gifts Made in Year 2 Deductible Gifts Made in Year 3 Deductible Gifts Made in Year 4 Year 4Year 2 Year 3
    44. 44. Not Deductible in Year 2 (over limit) Oldest carryover deductions are used first Charitable Deduction Maximum for Each Year Deductible in Year 1 (under limit) Not Deductible in Year 1 (over limit) Deductible Carryover Deductible Carryover Deductible Gifts Made in Year 3 Deductible Gifts Made in Year 4 Deductible Gifts Made in Year 5 Deductible in Year 2 (under limit) Year 1 Year 4Year 2 Year 3 Year 5
    45. 45. What happens to a carryover deduction if I don’t itemize (i.e., just take the standard deduction)?
    46. 46. Charitable Deduction Maximum for Each Year Deductible in Year 1 (under limit) Not Deductible in Year 1 (over limit) Carryover Eliminated Deductible Carryover Potentially Deductible Gifts Made in Year 2 Deductible Gifts Made in Year 3 Deductible Gifts Made in Year 4 The carryover is reduced as if you took the maximum possible charitable deduction In year 2 no gifts were deducted because the standard deduction was used Year 1 Year 4Year 2 Year 3
    47. 47. What happens to a carryover deduction if the donor dies?
    48. 48. The carryover deduction is lost at death. For joint returns, the carryover that could have been claimed by the decedent if the couple had filed separately is lost.
    49. 49. How do the different limits work together?
    50. 50. Holds 50% of Income Holds 20% of Income Holds 30% of Income Holds 30% of Income Each limitation rule is like a glass that can only hold so much. For each glass, you must find out if the total gifts for the year of that type will fit. All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    51. 51. Holds 50% of Income Holds 20% of Income Holds 30% of Income Holds 30% of Income Any overflow in any category is carried over. Some gifts may be carried over for more than one reason (i.e., they may spill out of more than one glass). All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    52. 52. Holds 50% of Income Holds 20% of Income Holds 30% of Income Holds 30% of Income $30,000 FMV LT capital gain property to public charity $20,000 cash to private foundation $100,000 income All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    53. 53. Holds 50% of Income Holds 20% of Income Holds 30% of Income Holds 30% of Income $100,000 income  $50,000    $30,000 $20,000 $0 $30,000 FMV LT capital gain property to public charity $20,000 cash to private foundation All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    54. 54. Holds 50% of Income Holds 20% of Income Holds 30% of Income Holds 30% of Income  $50,000    $30,000 $20,000 $0 No carryover. All deductions are allowed in the current year. $100,000 income All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    55. 55. If not all gifts can be deducted (i.e., there is carry over) which gifts get deducted first?
    56. 56. Current Value: $25 1990 Paid: $1 Current Value: $25 1990 Paid: $1 Cash or ordinary income property LT capital or tangible personal property valued at basis Cash or ordinary income property LT capital or tangible personal property valued at FMV Bill & Melinda Gates Private Foundation Bill & Melinda Gates Private Foundation LT capital or tangible personal property (any)
    57. 57. Holds 50% of Income Holds 20% of Income Holds 30% of Income Holds 30% of Income $30,000 cash to public charity $30,000 FMV LT capital gain property to public charity $100,000 income All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    58. 58. Holds 50% of Income Holds 20% of Income Holds 30% of Income Holds 30% of Income $100,000 income X $60,000    $30,000 $0 $0 $30,000 cash to public charity $30,000 FMV LT capital gain property to public charity All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    59. 59. Holds 50% of Income Holds 20% of Income Holds 30% of Income Holds 30% of Income $100,000 income   $30,000 $0 $0 $30,000 cash to public charity $30,000 FMV LT capital gain property to public charity $20k FMV capital gain property $30k cash $10k FMV capital gain propertyX  All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    60. 60. Holds 50% of Income Holds 20% of Income Holds 30% of Income Holds 30% of Income    $30,000 $0 $0 $10,000 carryover of FMV capital gain charitable deduction $20k FMV capital gain property $10k FMV capital gain propertyX  All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations $30k cash
    61. 61. Holds 50% of Income Holds 20% of Income Holds 30% of Income Holds 30% of Income $2,000 cash to public charity $56,000 FMV LT capital gain property to public charity $5,000 cash to private foundation $100,000 income All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    62. 62. Holds 50% of Income Holds 20% of Income Holds 30% of Income $100,000 income X $63,000 X  $56,000 $0 $2,000 cash to public charity $56,000 FMV LT capital gain property to public charity $5,000 cash to private foundation $5,000  Holds 30% of Income All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    63. 63. Holds 50% of Income Holds 20% of Income Holds 30% of Income $100,000 income  $0 $2,000 cash to public charity $56,000 FMV LT capital gain property to public charity $5,000 cash to private foundation $5,000  Holds 30% of Income $48k FMV capital gain property $2k cash to public charity $8k FMV capital gain propertyX   $5k cash to private f.X $30k FMV capital gain property $26k FMV capital gain propertyX All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    64. 64. Holds 50% of Income Holds 20% of Income Holds 30% of Income  $0 $5,000  Holds 30% of Income $48k FMV capital gain property $2k cash to public charity $8k FMV capital gain propertyX   $5k cash to private f.X $30k FMV capital gain property $26k FMV capital gain propertyX  $5,000 carryover of cash to private foundations $26,000 carryover of FMV LT capital gain property (includes the $8,000 already carried over for other reasons) All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    65. 65. $5,000 cash to private foundation: Deduct $0 $2,000 cash to public charity: Deduct $2,000 $56,000 FMV LT capital gain property to public charity: Deduct $30,000 + $5,000 carryover of cash to private foundations charitable deduction + $26,000 carryover of FMV LT capital gain property charitable deduction
    66. 66. Holds 50% of Income Holds 20% of Income Holds 30% of Income Holds 30% of Income $20,000 FMV LT capital gain property to public charity $20,000 LT capital gain property to private foundation $100,000 income All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    67. 67. Holds 50% of Income Holds 20% of Income Holds 30% of Income $100,000 income X  $40,000 $20,000 $20,000  Holds 30% of Income  $20,000 FMV LT capital gain property to public charity $20,000 LT capital gain property to private foundation All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations $40,000
    68. 68. Holds 50% of Income Holds 20% of Income Holds 30% of Income $100,000 income  $20,000 $20,000 Holds 30% of Income $40,000 $20,000 FMV LT capital gain property to public charity $20,000 LT capital gain property to private foundation $20k FMV capital gain to public charity $10k capital gain to priv. f.  $10k capital gain to priv. f.X All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations
    69. 69. Holds 50% of Income Holds 20% of Income Holds 30% of Income  $20,000 $20,000  Holds 30% of Income  $20k FMV capital gain to public charity $10k capital gain to priv. f.  $10k capital gain to priv. f.X $10,000 carryover of capital gain property given to a private foundation All gifts All gifts of LT capital gain (except “special election”) All gifts to private foundations or “for the use of” public charities All gifts of LT capital gain to private foundations $40,000
    70. 70. Income Limits on Charitable Deductions
    71. 71. Help me HERE convince my bosses that continuing to build and post these slide sets is not a waste of time. If you work for a nonprofit or advise donors and you reviewed these slides, please let me know by clicking
    72. 72. If you clicked on the link to let me know you reviewed these slides… Thank You!
    73. 73. This slide set is from the curriculum for the Graduate Certificate in Charitable Financial Planning at Texas Tech University, home to the nation’s largest graduate program in personal financial planning. To find out more about the online Graduate Certificate in Charitable Financial Planning go to www.EncourageGenerosity.com To find out more about the M.S. or Ph.D. in personal financial planning at Texas Tech University, go to www.depts.ttu.edu/pfp/ Graduate Studies in Charitable Financial Planning at Texas Tech University

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